Polls may create potential shocks, Moody's warns

Dadan Wijaksana, The Jakarta Post, Jakarta

International rating agency Moody's Investors Service has warned that the ongoing election process in Indonesia could slow down the pace of economic reform.

In its latest report on Indonesia, issued in New York on Tuesday, Moody's said that while the country had made progress in reforming its economy, the implementation of the reform program this year could be stymied by "potential shocks" arising from the legislative and presidential elections.

"Parliamentary and presidential elections in 2004 are only likely to make the achievement of targets and implementation of reforms more difficult this year," Moody's analyst Steven Hess, the author of the report, said.

The report, titled Indonesia: Global Credit Research, is updated once a year.

Indonesia is bracing itself for legislative elections on April 5, and presidential elections on July 5.

The elections might stall the privatization of state-owned companies and the sale of assets taken over from bank owners during the crisis, where the government had made fairly good progress so far, thanks in part to President Megawati Soekarnoputri's "competent economic team."

"The president has put in place a competent economic team, but her ability to get measures through Parliament has been less than complete," Moody's said.

Both privatizations and asset sales require approval from the House of Representatives.

The government recently sold another 10 percent stake in Bank Mandiri, and plans to auction stakes in dozens of other state enterprises, including Bank Negara Indonesia (BNI), the country's second largest bank; mining firm PT Aneka Tambang; tin producer PT Timah; coal miner PT Batubara Bukit Asam and a number of plantation firms later this year.

The government has targeted privatization proceeds of Rp 5 trillion for this year.

Elsewhere, the report also hailed the government for its achievement in reducing the ratio of public debt to gross domestic product (GDP), which it said was thanks in part to the steady rise of the rupiah against its U.S. counterpart.

However, risks remain as the government will need to repay all its maturing foreign debts this year in the absence of debt restructuring facilities from the Paris Club creditor nations. Indonesia has been deprived of these facilities as the government has decided not to renew a special lending program with the International Monetary Fund (IMF).

"While net international reserves may decline, this appears manageable," Moody's said. "But any shock to confidence that leads to an outflow of private capital could be problematic, however."

Moody's also said the government's current speculative-grade ratings and stable outlook still reflected both high government debt and steep foreign debt levels.

At present, Indonesia's ceiling for foreign currency debt is B2, while its ceiling for foreign-currency bank deposits is B3, according to the report.